While Unregistered, Binance Packaged and Sold BNB as a Security

FACTS

VII. BINANCE AND BAM TRADING ENGAGED IN UNREGISTERED OFFERS AND SALES OF SECURITIES.

A. Binance Offered and Sold BNB as a Security

287. BNB is an ERC-20 token that Binance issued on the Ethereum blockchain. In June 2017, Binance began issuing BNB—which was called “Binance Coin” until February 2022—in an ICO explicitly meant to fund the launch of the Binance.com Platform in July 2017. Binance’s BNB ICO was marketed and sold to investors globally, and Binance imposed no restrictions on U.S. investments in BNB or on the ability of BNB investors to immediately resell BNB to U.S. investors.

288. From the time of the ICO to the present, BNB was offered and sold as an investment contract and, therefore, as a security. 289. Binance offered and sold BNB as an exchange token, marketing it to investors as an investment in the success of the Binance.com Platform itself and touting both the potential returns that investors could achieve from purchasing the token by transacting on the platform and that investors could expect increased demand and price for the token as the platform grew.

290. To promote its ICO, Binance also issued the Binance Whitepaper to prospective BNB investors globally over the internet. The Binance Whitepaper explained that the purpose of the ICO was to raise money for Binance’s team to “build a world-class crypto exchange,” but that Binance needed the “help” of ICO “investors.” The Binance Whitepaper gave an overview of its proposed new crypto asset platform, touting several competitive advantages the platform would supposedly have over other crypto asset platforms due to Zhao and his cohorts’ supposed entrepreneurial and managerial expertise over the trading platform.

291. The Binance Whitepaper repeatedly referred to ICO participants as “investors,” and it lauded the credentials and financial expertise of Zhao and other founding members to create a successful crypto asset platform. Among other things, it highlighted that Zhao had “exchange experience” working on the Tokyo Stock Exchange and that several other “Founding Team” members had experience in the securities industry. It further touted that Binance’s “team has decades of combined experience building and maintaining world class financial systems that shape the economy. We understand how these systems are built from the ground up.”

292. The Binance Whitepaper concluded, “We know this will be an ultra competitive space. There are probably hundreds, if not thousands of teams wanting, planning or doing exchanges. Competition will be fierce. But in this age, this is a common risk in any decent concept/startup or mature company. The question is: given our team, track record, experience, industry resources and product, do you believe we stand a better chance than the rest of the pack? If yes, then please join our ICO.”

293. During the ICO, Binance created 200 million BNB on the Ethereum blockchain and stated publicly that it would never issue more BNB. Binance offered 100 million of the 200 million BNB in the ICO at approximately $0.15 per coin, and Binance structured the ICO in phases that involved increasing BNB prices with each phase (effectively offering a sale discount and potential immediate resale profit to early BNB investors). In less than a month, however, Binance had sold all 100 million BNB tokens during the ICO’s first phase at $0.15.

294. In the Binance Whitepaper, Binance also stated that it would reserve 40 percent of all BNB tokens, or 80 million BNB, for its “Founding Team” and 10 percent, or 20 million BNB, for “Angel investors” who purchased BNB prior to the ICO. For the Founding Team’s BNB allocation of 80 million BNB, Binance established a “vesting plan” that permitted the release of 20 percent of the 80 million BNB allocation, or 16 million BNB, during the ICO that was unrestricted at the time of issuance, and another 20 percent every year for four years.

295. Further, the Binance Whitepaper stated that Binance would “destroy,” or burn, half of the BNB over time by using Binance’s profits with respect to the Binance.com Platform to repurchase and then destroy BNB. Binance subsequently announced plans to accelerate the BNB burn rate. In deciding to use Binance’s profits to decrease the supply of BNB over time, Binance gave BNB investors a reasonable expectation of profits because lower demand tends to increase price, similar to how a stock issuer uses profits to provide dividends to investors or to execute stock buybacks to increase the ownership stake of remaining shareholders. In other words, in stating that it would use the profits from the platform to effectively support the price of BNB, Binance further tied the success of the platform to BNB’s success as well.

296. Indeed, on July 9, 2019, Zhao described Binance’s planned BNB burn in an interview posted on YouTube, stating that a “benefit we promised in the Whitepaper is every quarter we will use 20 percent of our profits to buy back [BNB] at the market value … we will buy back and destroy those. We will destroy up to 100 million Binance coins. Basically half of all available coins … Financially that works the same way as a dividend economically.”

297. Binance raised approximately $15 million through its ICO by selling BNB to about 20,000 investors globally. Approximately 32 U.S.-based investors purchased at least 504,000 BNB tokens during the ICO.

298. Binance pooled the proceeds of its BNB ICO to develop the Binance.com Platform—as it stated publicly it would. The Binance Whitepaper explained to BNB investors that funds raised by the ICO were to build the Binance.com Platform. It provided the following fund allocation: (1) 35 percent “to build the Binance platform”; (2) 50 percent for “Binance branding and marketing,” including to make Binance “popular among investors”; and (3) 15 percent in “reserve” for emergencies.

299. In public comments after the ICO was completed, Zhao noted the benefits of the ICO process to include brand recognition while “getting investment at the same time.” He further advised others looking to do an ICO that the business “team is key … Binance has a strong team. We spend a lot of effort describing our team. Make your team shine.”

300. Since the ICO, Binance has encouraged the Binance.com Platform’s customers to buy BNB by offering a 25 percent discount when investors use BNB to purchase a crypto asset. (This discount was 50 percent in the first year after the BNB ICO.) Accordingly, Binance creates additional financial incentives to buy BNB, thereby increasing demand for BNB, and its value. In other words, the trading discounts that Binance offered BNB purchasers further tie BNB’s success, and thus BNB purchasers’ profits, to Binance’s success.

301. Since Binance.com launched in July 2017, BNB has traded on the Binance.com Platform, and Binance and Zhao have continued to lead BNB investors to believe that BNB’s price is tied to the success of the Binance.com Platform. For example, in a public “Ask Me Anything” discussion on Reddit on June 28, 2017 (the “AMA”), Zhao explained:

302. Binance has continued to tout the investment potential of BNB over time, and has continued to tell investors after the ICO that Binance’s efforts to make the Binance.com Platform more profitable will increase BNB’s value. For example:

a. In an interview broadcasted globally on YouTube.com on October 10, 2018, Binance’s Chief Growth Officer stated, “By having people invest in BNB token, they’re even more interested in the success [of the Binance.com Platform] … By holding BNB, you are effectively holding an influential share of the crypto project.”

b. In an interview broadcasted globally on YouTube.com on January 10, 2020, Binance’s Managing Director stated, “Recently we launched lending, we launched staking, we launched futures, all of those new businesses contribute to the value of BNB.”

c. In an internal Binance town hall on December 17, 2020, Zhao stated, “[M]ost [use cases for BNB] are still early stage … [the Binance.com Platform] is [a] relatively big driving force for [BNB] value … For anything we are significantly involved in we’ll push BNB as much as we can. We’re also incentivizing the ecosystem … we have the Binance smart chain fund which we pledge $100 million we’ve given out … 20-30 grants already each one of them maybe about $100K or $50K um just for developers to come up with new use cases.” Zhao also stated, “I believe 100% that BNB will outpace BTC [bitcoin] … if I didn’t believe that I would just hold BTC … I’m fully bullish that BNB will outrun BTC.”

d. In an interview with Forbes on July 29, 2021, BAM CEO B stated, “[W]e have learned a lot from the BNB coin (the Binance token) about the power of coupling incentives inside of a smart contract with fungibility. Think about what the Binance token is—it represents the right to receive discounts on our trading fees, which people use it for, a lot. But increasingly, people are choosing to hold the token, rather than spend it for the discount because they found that the increased value of the token as the company grows, exceeds the financial value of the discounts. And so it gets our customers to act a little bit more like owners— people who want the company to succeed; their interests are aligned with that of the company.”

303. From the launch of BNB to the present, Binance has maintained a BNB price prediction blog on its website that tracked customers’ “consensus rating” and “price target” for BNB for the upcoming three years. Among other things, it offers the past 200-day moving average price for BNB and gives a resultant “bearish or bullish divergence” on the token, while cautioning that investors should “do your own research and trade on your own knowledge.”

304. Binance has additionally worked to increase demand for BNB by seeking to create additional ways in which BNB can be used—thereby further increasing demand for the token and its value. For example, Binance launched a $7.5 billion “venture capital arm” called “Binance Labs.” Binance Labs has invested more than $500 million in grants to individuals and entities developing applications for Binance blockchains, including BNB-related applications. And in October 2022, Binance announced that Binance Labs was investing in seven new projects that, as a Binance founder described, “will grow further and positively impact the BNB Chain and the broader crypto ecosystem.”

305. While Binance initially launched BNB on its own platform, it has also sought to make BNB available for trading on other platforms that, like the Binance Platforms, tend to attract investors in crypto assets. On June 28, 2017, Zhao explained, “Our current intention is to focus on building a successful exchange platform first. The coin will be valuable if the exchange [] has high trading volume, naturally people will want to buy and use the coin to pay for fees, which creates circulation and liquidity. We won’t be aggressively asking other exchanges to list the coin on their exchange. But if they want to, we won’t (can’t) stop it. We will happily support them, as it is good for us to have it trading on other exchanges as well.” As of March 30, 2023, BNB was traded on more than 100 crypto asset trading platforms.

306. In addition, since at least 2019, Binance has offered and sold BNB to its employees in the United States and elsewhere by offering to pay salaries in BNB.

307. Publicly reminding investors what the economic reality made plain—that Binance and its employees’ fortunes with respect to BNB were tied to BNB investors’ fortunes—Binance has frequently touted the popularity of Binance’s program of offering BNB as compensation to its employees. For example, in a February 11, 2019 interview, Zhao stated, “Almost all [employees] take some comp in BNB. Many take 100% in BNB. They know what we do, and how we do it, literally, from inside out. And it is an easy decision for them to make.”

308. Between 2019 and 2022, at least 37 U.S.-based Binance employees received over $3.89 million worth of BNB as salary. Binance did not place any restriction on these employees’ ability to resell their BNB tokens to any person, in whatever amounts they wished.

309. Binance has also offered and sold BNB to recruit new employees to work with Binance or BAM Trading. For example, when Zhao hired BAM CEO A, she received 50,000 BNB as an “Incentive Bonus.”

310. Further, in internal Binance town halls, Zhao frequently touted Binance’s Employee Stock Token Options Plan (“ESTOP”), which granted high performing employees BNB, essentially equivalent to employee stock options, as the best way for employees to profit from the growth of the Binance.com Platform. He has also encouraged Binance employees to hold BNB to share in the company’s profits, noting that it would correlate closely to the company’s long-term financial growth.

311. BNB has traded on the Binance.com Platform since its July 2017 launch and on the Binance.US Platform since its September 2019 launch.

312. Each BNB token is identical to every other BNB token, and the price of all BNB tokens increases or decreases together.

313. Furthermore, Binance’s distribution of tokens among investors and its Founding Team aligned their incentives in building a successful Binance.com Platform, as that would yield an increase in BNB’s market price that would yield profits to all BNB investors.

314. Since its ICO price of $0.15, BNB’s market price has risen in line with the growth of trading volume on the Binance.com Platform, which is now the largest crypto asset trading platform in the world. BNB’s market price as of March 30, 2023 was $317, and its market cap exceeded $50 billion, putting it in the top five most valuable crypto assets.